BancFirst: profits will fall due to the normalization of provisions

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BancFirst Corporation (NASDAQ:BANF) earnings will likely fall this year due to normalization of provisioning. On the other hand, Oklahoma’s economic strength will likely drive loan growth, which will support the bottom line. Additionally, loan and deposit mixes are well positioned for higher interest rates. Overall, I expect BancFirst to report earnings of $4.03 per share in 2022, down 20% year over year. The year-end target price is above the current market price. Accordingly, I adopt a retainer rating on BancFirst Corporation.

Last quarter’s loan growth momentum set to continue

After five consecutive quarters of decline, the loan portfolio finally recovered in the last quarter of 2021. Loans increased by a healthy 2.6% at the end of December 2021 compared to the end of September 2021. Part of the decline in during the first nine months of last year was attributable to the cancellation of Paycheck Protection Program (“PPP”) loans. As mentioned in the press release, PPP loans fell from $652.7 million at the end of December 2020 to $80.4 million at the end of December 2021. As the remaining PPP loans represent only 1.3% of total loans , their discount will have a limited effect. impact on the total size of the loan portfolio.

Moreover, the economic recovery bodes well for credit demand. BancFirst Corporation operates in Oklahoma through its subsidiary, BancFirst, and in Dallas, TX through Pegasus Bank. Oklahoma is faring much better than other states, as shown by the unemployment rate. Therefore, I expect the loan growth momentum achieved in the last quarter to continue into 2022.

Graphic
Data by YCharts

BancFirst Corporation’s pre-pandemic loan growth ranged from mid-single digits to low double-digits. I think the business can easily achieve mid-single-digit growth again in 2022. Overall, I expect the loan book to grow 6% by the end of 2022 versus the end of 2021. Due to the sharp decline in loans in the first nine months of 2021, the end-of-period growth estimate implies that the average loan balance in 2022 will be only 2% higher than the average balance for 2021. Meanwhile, deposits and other balance sheet items will likely grow in tandem with loans. The following table shows my balance sheet estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
Financial situation
Net loans 4,670 4,925 5,608 6,303 6,086 6,459
Net loan growth 7.3% 5.4% 13.9% 12.4% (3.5)% 6.1%
Other productive assets 2019 1,976 2,150 1,945 2,381 2,478
Deposits 6,415 6,605 7,484 8,065 8,092 8,588
Total responsibilities 6,478 6,671 7,561 8,144 8,234 8,734
Common Equity 776 903 1,005 1,068 1,172 1,248
Book value per share ($) 23.8 27.0 30.2 32.2 35.3 37.5
Tangible BVPS ($) 21.8 24.1 25.0 27.1 30.3 32.4

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Loan and deposit mixes to ensure rising interest rate environment translates into revenue growth

I expect three fed funds rate hikes this year starting in March, for a total of 75 basis points. BancFirst’s loan portfolio is well positioned to quickly benefit from any rise in interest rates. Around 44% of BancFirst’s loans are at adjustable rates, as mentioned in the 10-K Rating. In addition, approximately 12.7% of total loans are fixed rate loans that will mature in 2022. As a result, the majority of the loan portfolio will be repriced soon after a rate hike.

Liabilities are also well positioned for a rate hike, as non-interest bearing deposits accounted for a remarkable 46% of total deposits at the end of 2021. These non-interest bearing deposits will ensure that the average cost of deposits remains at the rise. sticky in a rising interest rate environment.

BancFirst let a substantial amount of deposits flow during the fourth quarter of 2021, which led to a significant drop in excess cash on hand. Nonetheless, cash is still higher than usual, allowing BancFirst to quickly deploy excess cash into higher-yielding assets once the fed funds rate rises. The following graph shows the development of the largest component of cash, ie remunerated deposits with other banks.

Cash flow trend BancFirst Corporation

SEC Filings

Given these factors, I expect the average margin in 2022 to be approximately 28 basis points higher than the average margin for 2021. This estimate is higher than I expected in my last report on BancFirst. I revised my estimate up because economic data released after my last BANF report made my stance on interest rates more hawkish than before.

Provision standardization to drive revenue

BancFirst reversed much of its previous provisioning in the second quarter of last year. Since then, provisioning has been close to zero. This trend shows that BancFirst has completed its reserve releases and is comfortable with the current level of provisions. As mentioned in the earnings release, provisions represented 1.36% of total loans, while unaccrued loans represented 0.34% of total loans at the end of December 2021.

Additions to the loan portfolio will likely be the main driver of provision charges this year. Overall, I expect the provisioning charge to return to a normal level in 2022. I expect the provisioning charge to be around 0.14% of total loans this year, which is the same as the average provision charge-to-total loan ratio from 2017 to 2019.

Earnings expected to fall to $4.03 per share

The normalization of provisions will likely be the biggest contributor to lower earnings this year. In addition, non-interest income will likely decline due to lower mortgage banking income. Mortgage refinancing activity will slow to a more normal level this year as higher interest rates discourage loan refinancing.

On the other hand, mid-single-digit loan growth and margin expansion will likely support the bottom line. Overall, I expect the company to report earnings of $4.03 per share in 2022, down 20% year over year. The following table shows my income statement estimates.

EX17 EX18 FY19 FY20 FY21 FY22E
income statement
Net interest income 227 260 282 307 316 318
Allowance for loan losses 9 4 8 63 (9) 9
Non-interest income 118 125 137 137 170 146
Non-interest charges 200 222 241 258 286 286
Net income – Common Sh. 86 126 135 100 168 134
BPA – Diluted ($) 2.65 3.76 4.05 3.00 5.03 4.03

Source: SEC Filings, Author’s Estimates

(In millions of dollars, unless otherwise indicated)

Compared to the estimates given in my last BancFirst report, I slightly increased my profit estimate because I changed my margin estimate and changed my non-interest expense estimate.

Actual earnings may differ materially from estimates due to the risks and uncertainties associated with the COVID-19 pandemic and the timing of an interest rate hike. The Russian-Ukrainian war is also one to watch.

Current market price above the target price for the coming year

BancFirst offers a dividend yield of 1.8% at the current quarterly dividend rate of $0.36 per share. Earnings and dividend estimates suggest a payout ratio of 36% for 2022, which is in line with the five-year average of 35%. Therefore, I do not expect any change in the level of dividends for the remainder of this year.

I use historical price/accounting tangible (“P/TB”) and price/earnings (“P/E”) multiples to value BancFirst. The stock has traded at an average P/TB ratio of 2.15x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Average
T. Book value per share ($) 21.8 24.1 25.0 27.1 30.3
Average market price ($) 50.2 57.9 56.0 45.5 64.5
Historical P/TB 2.30x 2.40x 2.24x 1.68x 2.13x 2.15x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple by the expected tangible book value per share of $32.4 yields a price target of $69.7 for the end of 2022. This price target implies a decline of 11.0% compared to the closing price on March 11. The following table shows the sensitivity of the target price to the P/TB ratio.

Multiple P/TB 1.95x 2.05x 2.15x 2.25x 2.35x
TBVPS – Dec 2022 ($) 32.4 32.4 32.4 32.4 32.4
Target price ($) 63.3 66.5 69.7 73.0 76.2
Market price ($) 78.3 78.3 78.3 78.3 78.3
Up/(down) (19.2)% (15.1)% (11.0)% (6.8)% (2.7)%
Source: Author’s estimates

The stock has traded at an average P/E ratio of around 15.2x in the past, as shown below.

EX17 EX18 FY19 FY20 FY21 Average
Earnings per share ($) 2.7 3.8 4.0 3.0 5.0
Average market price ($) 50.2 57.9 56.0 45.5 64.5
Historical PER 18.9x 15.4x 13.8x 15.2x 12.8x 15.2x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple by the expected earnings per share of $4.03 yields a price target of $61.3 for the end of 2022. This price target implies a decline of 21.7% from at the closing price on March 11. The following table shows the sensitivity of the target price to the P/E ratio.

Multiple P/E 13.2x 14.2x 15.2x 16.2x 17.2x
EPS 2022 ($) 4.03 4.03 4.03 4.03 4.03
Target price ($) 53.3 57.3 61.3 65.4 69.4
Market price ($) 78.3 78.3 78.3 78.3 78.3
Up/(down) (32.0)% (26.8)% (21.7)% (16.5)% (11.4)%
Source: Author’s estimates

Equal weighting of target prices from both valuation methods gives a combined result target price of $65.5, implying a 16.3% drop from the current market price. Adding the forward dividend yield gives an expected total return of minus 14.5%. Accordingly, I adopt a retainer rating on BancFirst Corporation.

Luisa D. Fuller